4 Value Stocks In The Vanguard Industrials ETF

Delta Faucet Company Corporate Headquarters I

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The Vanguard Industrials ETF (NYSEARCA:VIS) has dropped 10% from its peak price of $208 in November 2021. Investors have fled to the safety of consumer staples, healthcare, and utilities amid high inflation, the war in Europe, and the prospect of higher interest rates slowing down the economy or even causing a recession. If this industrial ETF drops another 5%, it would be at 52-week lows. I analyzed the returns and dividend yields of the top 147 stocks in the Vanguard Industrials ETF, looking for some value stocks to add to my long-term portfolio. These stocks made up 90% of the holdings in the ETF. There are a total of 354 companies in this ETF.

Transports Have Sold-off Hard, XPO Logistics Looks Oversold

Ten stocks in this list have dropped over 30% in the past year (see Exhibit 1). The majority of the companies on this list (See Exhibit 1) have booked losses and do not pay a dividend. XPO Logistics (XPO) is trading close to its 52-week low and looks oversold. It is trading at a forward EV to EBITDA multiple of just 8x, while its five-year average multiple is 10x. It has an excellent free cash flow yield of 5.8% and is forecasted to earn $5.24 per share for this fiscal year ending December 2022. It has a forward PE of just 12x compared to the sector median of 18x. It has a return on equity of [ROE] of nearly 16% compared to Knight Swift’s ROE of 12%.

Fear of recession has gripped the U.S. stock markets, and transportation stocks have borne the brunt of losses in the past week. The Dow Jones Transportation Average Index (DJT) dropped 6% during the week of April 4, 2022 (See Exhibit 2). XPO does not pay a dividend, and its debt to EBITDA ratio is above 4x, which is high. These are the two negatives of this stock. I prefer stocks with a dividend yield above the S&P 500 (VOO) and a debt to EBITDA ratio of 2x or lower. XPO Logistics is trading well below its 50-day and 200-day moving average, and the RSI and MFI technical indicators are at 49, having bounced off from their lows. I would like to see the RSI and MFI reach the oversold territory of close to 30 before buying. Any further weakness in this stock may take it there and present an excellent opportunity to open or add to an existing position.

Exhibit 1: Worst Performers in the Vanguard Industrials ETF

Worst Performers in the Past Year in the Vanguard Industrials ETF as of April 2022

Worst Performers in the Past Year in the Vanguard Industrials ETF as of April 2022 (iexcloud.io, Author Compilation)

Exhibit 2: Dow Jones Transportation Index Performance for the Week of April 4, 2022

Dow Jones Transportation Index Performance During the Week of April 4 2022

Dow Jones Transportation Index Performance During the Week of April 4 2022 (Seeking Alpha)

Next, I looked at stocks that have lost between 20% and 30% of their value in the past year (See Exhibit 3).

Exhibit 3: Stocks in the Vanguard Industrials ETF that has Lost 20% to 30% in the Past Year

Companies in the Vanguard Industrials ETF Which Have Lost 20% to 30% Over the Past Year

Companies in the Vanguard Industrials ETF Which Have Lost 20% to 30% Over the Past Year (iexcloud.io, Author Compilation)

Fortune Brands may be a Great Brand to Own

My favorite on this list is Fortune Brands Home & Security (FBHS) as a long-term holding. This plumbing, security products, and cabinets maker has dropped from its 52-week high price of $114.01 in March 2021 to $72.89 as of March 8, 2022. I recently bought a few shares at an average cost of $77.33. I would add to my holdings if it drops below $70. It is trading at a forward EV to EBITDA multiple of 8x. Its five-year average multiple is 11x, and the current sector median is 10x. It has a dividend yield of just 1.54%, which is barely higher than the dividend yield of 1.34% offered by the S&P 500 index. It has good dividend grades (See Exhibit 4) and a safe dividend with a low payout ratio of 18.1%. Its debt to EBITDA ratio is at a very manageable multiple of 2x. It has a good return on invested capital [ROIC] of 13% compared to A. O. Smith’s (AOS) ROIC of 24.6%. The company has a return of equity [ROE] of 25%, similar to the ROE of A. O. Smith’s – one of its peer companies.

Exhibit 4: Seeking Alpha Dividend Grades for Fortune Brands Home & Security

Seeking Alpha Dividend Grades for Fortune Brands Home and Security

Seeking Alpha Dividend Grades for Fortune Brands Home & Security (Seeking Alpha)

Cummins Offers a Way to Play the Transition to Renewable Energy

Another company on this list that I love is Cummins (CMI). This company has lost 22% of its value in the past year and is now trading near 52-week lows. I own shares at an average cost of $208.78, and I am looking to add more if it drops below $190. This stock is a great way to play the energy transition to electric and hydrogen-powered vehicles. It has a stellar dividend grade from Seeking Alpha (See Exhibit 5) and offers a dividend yield of 2.98%. It has a moderate payout ratio of 39% and has a solid balance sheet with low debt. Its debt to EBITDA ratio of just 1.1x. Its Return on Invested Capital [ROIC] is 600 basis points higher than its competitor, such as Oshkosh (OSK) (See Exhibit 6). Its Return on Equity [ROE] is 1000 basis points higher than Paccar (PCAR).

Exhibit 5: Seeking Alpha Dividend Grades for Cummins

Seeking Alpha Dividend Grades for Cummins

Seeking Alpha Dividend Grades for Cummins (Seeking Alpha)

Exhibit 6: Comparing Return on Invested Capital of Cummins, PACCAR, Oshkosh

Comparing Return on Invested Capital of Cummins, PACCAR, Oshkosh

Comparing Return on Invested Capital of Cummins, PACCAR, Oshkosh (Seeking Alpha)

Energy and oil industry guru – Daniel Yergin – says we are in an energy mix era where the world will need multiple sources of power – wind, nuclear, solar, and hydrogen – to keep our homes warm and our economy moving. Hydrogen will have a sizeable share of the energy market, and Cummins may be one way to play this trend. Cummins is also a player in electric vehicles. Today Cummins is trading at a cheap valuation, but once its hydrogen and electric business finds traction in the market, it will be a valuable stock.

Masco is Undervalued

Finally, I looked at stocks that have lost between 10% and 20% of their value in the past year (See Exhibit 7). I like the maker of Behr Paints and Delta Faucets – Masco Corporation (MAS) – on this list. I recently opened a position in Masco at an average price of $52.55, and it currently trades at $50.67. It is valued at a forward EV to EBITDA multiple of 8x. Its average EV to EBITDA multiple is close to 11x. The company offers a good dividend of 2.2% with a conservative payout ratio of 26%. It generates a return on invested capital [ROIC] of 13%, similar to the return generated by Fortune Brands. This company has a reasonable debt to EBITDA ratio of 2.5x. Masco is trading below its 50-day and 200-day SMA with MFI and RSI technical indicators in the low- to mid-thirties. I am looking to add to my position if the price drops below $50.

Exhibit 7: Companies in the Vanguard Industrials ETF that have Lost 10% to 20% in the Past Year

Companies in the Vanguard Industrials ETF that have Lost 10% to 20% in the Past Year

Companies in the Vanguard Industrials ETF that have Lost 10% to 20% in the Past Year (iexcloud.io, Author Compilation)

Conclusion

There are a lot of industrial companies in the Vanguard Industrials ETF that has lost value over the past year. This market may present more opportunities to buy into these stellar companies if the industrials sell off further. These four companies may offer significant long-term value. I am impressed by Cummins, Masco, Fortune Brands Home & Security, and XPO Logistics.

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